It was an eventful week. Understandably, many were focused on the social unrest that permeated across the United States. As a result, there was less attention paid to the pandemic and state of the economic recovery. This week, we take a look at developments on both fronts, and also discuss the noteworthy move in the Canadian dollar.

 

Coronavirus update

A second wave of the coronavirus has been a concern since the beginning of this pandemic. Unfortunately, the risks of such an occurrence, particularly in the U.S., have increased. The mass protests across the country have resulted in a sharp unwind of the social distancing behaviour that had existed across many American cities in recent months. There is no guarantee of a rise in infections once the incubation period expires in a week or two. In fact, should no spike in new cases ensue, it could suggest the transmission risks have declined, and lead to further easing of restrictions and act as another positive catalyst for stock markets. But the mass gatherings have created multiple opportunities for the virus to spread and re-emerge as a more serious risk. While markets do not appear very concerned about this, we believe it is something that bears watching.

 

Meanwhile, new virus case counts in Canada largely remain on an improving trajectory in the two more problematic provinces of Quebec and Ontario. It is worth noting the latter has been plagued by sporadic increases in cases again this week. Meanwhile, in the U.S., overall levels have not changed much week over week but there have been notable increases in cases across California, Arizona, and Alabama for example. Some of this may be attributable to increased testing, but it bears monitoring nonetheless. In Latin America, Brazil continues to report more than 20,000 new daily cases per day, suggesting there is limited visibility around the potential for its peak in new cases. Elsewhere, there were meaningful developments in the Middle East and Asia. Iran appears to be experiencing a second wave, after having reported its largest increase in new daily case counts since March. Meanwhile, Pakistan has also reported a surge. Both are notable as each country appeared to have their outbreaks well under control in recent months. Lastly, India recorded a high in new daily cases this week suggesting it may still be a ways away from containing the virus.

 

The rebounding economy

Millions of people lost their jobs across North America over the past month. This is on top of the millions that were lost in April. That paints a rather depressing and real picture of the current state of the economy. But, markets tend to be less concerned about the present and more focused on the future. In other words, it’s the change in trend that is more important for investors. And the change has been positive. Weekly jobless claims for example have now declined for nine straight weeks in the U.S. and there have been early signs of certain jobs coming back, suggesting some of the job losses may only be temporary in nature.

 

Meanwhile, more “real time” or high-frequency data as it is often called is also portraying a slowly improving picture. For example, internet searches for “filing unemployment” have made fresh lows, driving mobility is nearly back to normal levels, the rate of year over year decline in retail sales is improving, and restaurant reservations are trending in the right direction. Even the Bank of Canada this week acknowledged that our country appears to have avoided the worst case outcome. The economic rebound is not just a North American phenomenon as monthly services and manufacturing data across China and much of Europe this week showed evidence of improving over the past month. Much work remains, but the overall trend is improving, rather than deteriorating. And with the prospects of extensions and expansions of aid and stimulus programs across China, Europe, and North America, governments and central banks remain very focused on providing economic support.

 

The rise of the loonie…or the fall of the U.S. dollar?

The Canadian dollar had quite the week, breaching the $0.74 level for the first time since the beginning of March. But, its move higher may have more to do with the global recovery than with what’s transpiring domestically. While the U.S. dollar has fallen relative to the Canadian dollar, it has also depreciated against other major currencies too. And just as the U.S. dollar strengthens during periods of crisis as investors flock to it for its relative “safe haven” status, it can weaken as investor concern fades and risk appetite rises. We expect the weakness in the U.S. dollar may continue in the weeks to come barring any setbacks in the health crisis. But looking out beyond the next few months, Canada’s domestic challenges – high consumer debt loads, lack of pipeline capacity that exacerbates depressed energy prices, and weaker overall competitiveness levels - remain structural headwinds that may limit any sustainable move higher in the loonie.

 

Overall, we are encouraged by the broadening rally across equities and currencies, which suggests growing confidence in the economic recovery. Its path and sustainability longer-term remain questions in our minds. A new near-term risk has presented itself in the form of the abandonment of social distancing across the United States. We will be watching closely to see if it results in a re-escalation of the health crisis.

 

Should you have any questions or concerns, please feel free to reach out.